13/3/2019

Jumia gets a taste of online fraud

By PAUL WAFULA

In Summary

The firm is active in 14 countries in Africa but Kenya accounts for a significant part of this business.

Jumia says in addition to seller fraud and fraudulent transactions with legitimate consumers, sellers are also engaging in fictitious or “phantom” transactions with themselves or collaborators.

It noted that although it had implemented various measures to detect and reduce the occurrence of fraudulent activities on its platform, there can be no assurance that such measures will be effective in combating fraudulent transactions.

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Fraudsters used electronic cards to acquire goods worth over Sh62 million from Jumia in 2017, giving the online shopping platform a taste of online fraud.

Jumia says in addition to seller fraud and fraudulent transactions with legitimate consumers, sellers are also engaging in fictitious or “phantom” transactions with themselves or collaborators in order to artificially inflate their own ratings on its platform, build their reputation and search results rankings.

“A group of consumers in Kenya fraudulently used electronic payment suppliers to acquire approximately €550,000 (Sh62.3million at current exchange rates) in goods on our marketplace in December 2017. Consumer fraud may harm seller confidence in the integrity of our marketplace and the certainty of payment,” Jumia says in a prospectus where it is seeking to raise Sh10billion by selling shares to international investors.

MORE TROUBLES

The prospectus was filed with the Securities and Exchange Commission in the United States this week by its parent company Jumia Technologies AG. It is a requirement for companies to tell their potential investors all the risks facing them and the mitigating measures they have put in place before being allowed to sell their shares publicly.

The other headache for the firm is payment on delivery. In Kenya approximately 95 per cent of its consumers pay cash on delivery. But early last year, the firm discovered that nearly Sh81.5milion (€720,000) cash payments done in 2016 remained uncollected, the large majority of which was never subsequently collected.

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To add to its troubles, thugs broke into its warehouses here in Kenya late 2018, and stole merchandise with a value of approximately Sh56million (€500,000).

The firm is active in 14 countries in Africa but Kenya accounts for a significant part of this business.

The e-commerce platform, which has incurred losses since inception, also notes that a failure to deal effectively with any fraud perpetrated and fictitious transactions conducted on its platform and other sources of consumer dissatisfaction could harm its business.

“We face risks with respect to fraudulent activities on our platform. Given the countries in which we operate, the number of participants on our platform and the fragmentation of our business, it is a challenge to anticipate, detect and address fraudulent activities,” the firm says.

NO ASSURANCE

The online shopping site, which is one of the most successful in the east Africa region, noted that although it had implemented various measures to detect and reduce the occurrence of fraudulent activities on its platform, there can be no assurance that such measures will be effective in combating fraudulent transactions or improving overall satisfaction among sellers, consumers and other participants.

It argues that additional measures that we take to address fraud could also negatively affect the attractiveness of our platform to sellers or consumers, putting it at a loss.

“For example, we may receive complaints from consumers who may not have received goods that they had purchased, or complaints from sellers who have not received payment for the goods ordered,” Jumia notes.

This activity may harm other sellers by enabling the perpetrating seller to be favoured over legitimate sellers and may harm consumers by deceiving them into believing that a seller is more reliable or trusted than the seller actually is.

LIMITED RISK

The firm says it operates with limited inventory risk given that most of the goods it sells belongs to third-party sellers, meaning the cost of inventory remains with the seller.

“In 2018, approximately 90 per cent of the items sold on its marketplace were offered by third-party sellers.

The firm tells investors in the prospectus that its business has grown significantly over the years. By the end of last year, the firm had four million active consumers, up from 2.7 million at the same time in 2017.

But despite the growing in numbers, the firm is still in the red.

It says its consolidated operating loss increased from about Sh17 billion in 2017 to Sh19 billion in 2018.

The firm says illegal, fraudulent or collusive activities by employees could have a material adverse effect on its business.

“While we have not experienced any material events of this nature in the past, we have identified allegations of employee misconduct, which led us to improve our internal controls and our cash reconciliation system,” the firm said.